Is Your Office Lease Stark Law Compliant? A Checklist for Practice Owners (42 CFR § 411.357(a))

For small practices, a landlord’s “standard medical lease” can quietly defeat the Stark Law rental exception and convert Medicare designated health services (DHS) claims into nonpayable bills. The rental of office space exception at 42 C.F.R. § 411.357(a) protects physician leases, but only if every element is met: a written, signed lease of at least one year, FMV rent set in advance, exclusive use during the term, no percentage-of-revenue or per-click formulas tied to DHS, and square footage reasonably necessary for legitimate business purposes. If any element fails, the billing prohibition at § 411.353 applies. This guide translates § 411.357(a) into a practical owner’s checklist, shows common mistakes that have driven costly repayments, and gives a step-by-step plan to fix problems with minimal budget. Treat your lease like a clinical device: if uncalibrated, it can harm the practice.

Stark is a strict liability law: intent does not matter. If a physician (or immediate family) has a financial relationship with the DHS entity and a referral occurs without a valid exception, Medicare claims are nonpayable (42 C.F.R. § 411.353; definitions at § 411.351; financial relationships at § 411.354). Leases with hospitals, imaging centers, IDTFs, labs, or other physician-owned entities are common and legitimate, but only when structured to fit § 411.357(a) precisely. Small practices are at particular risk because percentage rent, free-rent periods, build-out credits, “as-needed” expansion rights, and shared waiting rooms are baked into many property deals. The good news: with a short checklist and a tidy evidence pack, owners can make leases resilient and keep DHS claims payable.

Understanding Lease Compliance Under 42 C.F.R. § 411.357(a)

The rental of office space exception shields a lease if it meets all key elements in § 411.357(a), which, in plain terms, require:

• Written, signed agreement that specifies the premises and the term of at least one year.

• Exclusive use of the premises by the lessee during the times covered by the lease (subject to subparagraph allowances) and a description precise enough to avoid “roaming” space.

• Rent set in advance, consistent with fair market value (FMV), not determined in a manner that takes into account the volume or value of referrals, and not using percentage-of-revenue or per-click metrics tied to DHS.

• Space is commercially reasonable and no more than is reasonably necessary for legitimate business purposes.

• No unlawful services included as a bundle with rent; if there are related services or equipment, they must themselves satisfy applicable exceptions (e.g., § 411.357(b) for equipment, § 411.357(d) for personal services).

• Holdover arrangements must satisfy the rule’s conditions if the lease continues past the original term.

Why it reduces risk: when the lease cleanly matches § 411.357(a), DHS referrals from physicians to the entity are not “prohibited referrals,” and claims do not fall under the § 411.353 billing prohibition. The lease is not about “papering the file”, it is a gatekeeper that preserves the payability of your claims.

OCR (Office for Civil Rights) enforces HIPAA, not Stark. CMS administers Stark’s payment regulations (42 C.F.R. part 411, subpart J), and OIG/DOJ may become involved where related fraud or abuse issues arise. Even though OCR is not Stark’s enforcer, HIPAA investigations often require production of policies, schedules, and access controls. Strong HIPAA documentation habits, like accurate room assignment logs, vendor access procedures, and signed BAAs, create disciplined records that also support exclusive use, supervision, and commercial reasonableness narratives for your Stark file. In short: OCR doesn’t enforce § 411.357(a), but OCR-grade documentation makes Stark audits easier to pass.

Owners can operationalize § 411.357(a) with the following sequence. Each step includes how to comply, the documents to maintain, and a low-cost option.

1) Map the Premises Precisely.

• How to comply: Attach a to-scale floor plan that identifies exclusive rooms, common areas, and any shared amenities; the lease must specify the premises.

• Documents: Floor plan with suite number(s), square footage, and room list; photos.

• Low-cost tip: Use free diagramming tools; cross-reference the plan in the lease exhibit.

2) Prove Exclusive Use for the Term.

• How to comply: Identify time blocks of exclusive possession; if there is time-share usage, ensure the lease states the specific time slots and rooms without “as-needed” drift.

• Documents: Weekly schedule, badge logs, key issuance list, locked-room policy.

• Low-cost tip: A shared calendar and a simple key-control sheet demonstrate exclusivity.

3) Lock FMV and Set-in-Advance Rent.

• How to comply: Rent must be FMV, set in advance, and not based on referral volume or value. Avoid percentage-of-collections, per-scan add-ons, or revenue kickers.

• Documents: FMV memo (local comps, broker quotes, survey data), dated rent schedule.

• Low-cost tip: Obtain three broker quotes for comparable medical space and keep emails.

4) Right-Size the Space.

• How to comply: Lease no more space than reasonably necessary for legitimate operations; avoid roaming storage rooms.

• Documents: Space-need worksheet tying FTEs and equipment to rooms; inventory log.

• Low-cost tip: Use a one-page template showing “staff × room function × hours.”

5) Separate Services and Equipment.

• How to comply: If cleaning, reception staffing, imaging equipment, or IT are included, ensure those are priced separately and, if applicable, meet § 411.357(d) (services) or § 411.357(b) (equipment).

• Documents: Separate schedules for services/equipment with fixed fees set in advance.

• Low-cost tip: Strip all extras from rent; purchase services via a standalone agreement.

6) Eliminate Variable Rent Tied to DHS.

• How to comply: No per-click rent for scans or percentage of practice revenue; use fixed monthly base rent.

• Documents: Lease clause showing fixed rent; invoice trail with flat charges.

• Low-cost tip: If the landlord insists on variability, tie it to a public index (e.g., CPI) with a cap and annual adjustment, not to procedures or revenues.

7) Control Build-Out Credits and Free Rent.

• How to comply: Improvement allowances and concessions must reflect market terms, not referral inducements.

• Documents: Contractor bids, allowance invoices, and a short FMV analysis for concessions.

• Low-cost tip: Get two independent bids; reconcile allowance to real costs.

8) Holdover with Care.

• How to comply: If you continue past the first year, the holdover must meet § 411.357(a) conditions (e.g., on same terms, limited duration under the rule as applicable).

• Documents: Holdover notice, month-to-month addendum, rent schedule unchanged.

• Low-cost tip: Calendar reminders 120/90/60 days pre-expiration to avoid unpapered holdover.

9) Document Commercial Reasonableness.

• How to comply: The arrangement must make sense even absent referrals; a short memo explaining clinical need, location benefits, and staffing is sufficient.

• Documents: One-page justification memo; patient-access map; parking counts.

• Low-cost tip: Use a standard template with checkboxes and a paragraph of narrative.

10) Build the 48-Hour Evidence Pack.

• How to comply: Be able to produce within 48 hours: signed lease and all exhibits, FMV memo, floor plan, room list, key logs, rent invoices/receipts, cleaning/services addenda, and holdover documents.

• Documents: A single digital binder per lease.

• Low-cost tip: Name files consistently: “Lease_357a_[Suite]_YYYYMMDD.pdf”.

Case Study

Setting: A three-physician orthopedic group subleases 2,700 sq. ft. from a hospital-owned imaging center. The sublease includes a shared waiting room, “as-needed” overflow exam room access, housekeeping, and “percentage rent” equal to 3% of monthly orthopedic collections after the first year to “keep pace with practice growth.”

Findings:

• The percentage rent is not set in advance and varies with the lessee’s revenue, classic volume or value problem incompatible with § 411.357(a).

• The overflow exam room is not identified on the exhibit and is “as-needed,” violating the specificity and exclusive use requirements.

• Housekeeping is bundled in rent without a separate, fixed set-in-advance services schedule; no FMV support is on file.

Consequences:

• Because the rental exception fails, referrals by the group’s physicians for DHS furnished by the imaging center are prohibited referrals, rendering claims nonpayable under § 411.353 for the impacted period. The practice quantifies and refunds DHS claims for which its physicians made referrals to the imaging center during the defective lease period.

Remediation:

• Amend the lease: remove percentage rent and replace with a fixed base rent adjusted annually via CPI with a cap; attach a detailed floor plan with the overflow exam room identified and scheduled blocks that ensure exclusive use during designated times.

• Price housekeeping as a separate fixed monthly fee supported by market quotes; create an FMV memo with two janitorial bids.

• Assemble a 48-hour evidence pack and calendar lease renewal milestones to avoid holdover drift.

Outcome: After amending and documenting, the practice regains § 411.357(a) protection, submits refunds for the tainted period, and implements a quarterly evidence drill to keep the file audit-ready.

Running this table regularly keeps the lease aligned to the exception and ensures that DHS claims remain payable.

Common Pitfalls to Avoid Under 42 C.F.R. § 411.357(a)

Before listing pitfalls, remember that each problem maps back to a specific exception element. Avoiding these errors prevents the § 411.353 billing prohibition from attaching to your DHS claims.

• Percentage rent or per-click rent tied to DHS volume. This violates the set-in-advance and no volume/value elements of § 411.357(a), risking tainted referrals and refunds. Consequence: Look-back, repayment, and contract overhaul.

• “As-needed” or roaming space. If the lease doesn’t identify specific rooms or time blocks, exclusive use and premises specificity are not satisfied. Consequence: Exception failure despite “market practice” arguments.

• Free rent or build-out credits without FMV support. Concessions may be commercial, but absent documentation they can look like inducements. Consequence: Exception fragility and difficult audit defenses.

• Bundled services with no separate fixed fee. Cleaning, reception, or IT support included in base rent without a fixed, set-in-advance charge can undermine § 411.357(a) and may need § 411.357(d) coverage. Consequence: Exception gaps and repayment risk.

• Unpapered holdover. Month-to-month drift without documentation jeopardizes the one-year term element and may change economics. Consequence: Exception lapse until re-papered.

Avoiding these pitfalls preserves the integrity of your rental exception and keeps claims safely outside § 411.353.

These practices are affordable and directly align with the exception’s text.

• Exhibit A is your shield. Attach a labeled floor plan with room numbers, square footage, and any time-share blocks; reference it in the lease to satisfy premises specificity and exclusive use.

• Rent memo with dates. A one-page FMV memo dated at signing, listing local comps and broker quotes, proves FMV and set-in-advance rent.

• Separate schedules for extras. Put housekeeping, reception, or IT as Schedule B with fixed fees set in advance; cross-walk to § 411.357(d) if services are material.

• Anti-drift calendar. Automate renewal alerts at 120/90/60 days before expiration to prevent accidental holdover or concessions that could look like inducements.

• Single source of truth. Maintain a lease evidence pack in one folder, with invoices and receipts; run a quarterly production drill to ensure you can deliver within 48 hours.

Together these habits hard-wire the exception into daily operations and demonstrate good-faith, organized compliance.

Culture is what prevents “small” lease tweaks from becoming large Stark problems.

• Leadership stance: “If it’s not fixed, priced, and signed, we don’t take the keys.” This reinforces written, signed, set-in-advance principles.

• Role-specific training:

• Administrators: exception elements, FMV basics, and how to reject variable rent.

• Clinicians: why “overflow” rooms must be on the plan and scheduled.

• Billing: when to pause DHS claims if the lease evidence pack is incomplete (link to § 411.353).

• Vendor onboarding: Standard landlord letter explaining Stark requirements (no percentage rent, no roaming space, separate fees for services).

• Positive reinforcement: Recognize staff who catch exception defects during renewals or build-outs.

A shared understanding that the lease is part of billing compliance, not just facilities, prevents costly breakdowns.

Owner’s 7-day plan:

1. Pull every lease and sublease; build a one-page summary showing term, rent, square footage, and exceptions relied upon.

2. Mark any percentage/per-click language for immediate amendment to fixed rent set in advance.

3. Attach or update the floor plan exhibit; identify rooms and time blocks to prove exclusive use.

4. Create or refresh a dated FMV memo with three local quotes.

5. Strip bundled services out of rent; re-paper as separate fixed-fee schedules or standalone agreements under § 411.357(d) as applicable.

6. Calendar renewal/holdover alerts; prepare a standard holdover addendum that preserves the same economics if needed temporarily.

7. Assemble the 48-hour evidence pack and run a drill; pause any DHS scheduling that depends on a lease with open defects.

Why this works: Each action maps to a specific § 411.357(a) element, directly preventing the § 411.353 billing prohibition from attaching to your DHS claims. The result is resilient, audit-ready leases and predictable cash flow.

Advisers (Affordable Tools & Free Government Resources)

• CMS Stark Law Regulations and FAQs. Primary text and agency interpretations for Stark and its exceptions.

• CMS Self-Referral Disclosure Protocol (SRDP). A structured option to resolve discovered Stark issues associated with nonpayable DHS claims.

• OIG Advisory Opinions & Special Fraud Alerts. While focused on AKS, they sharpen understanding of volume or value and FMV concepts relevant to rental economics.

• Federal Register Stark Rulemakings and Preambles. Preambles explain regulatory intent, useful when negotiating lease language and documenting commercial reasonableness.

• HHS OCR HIPAA Guidance. Strengthens documentation, access control, and scheduling records that support exclusive use narratives during audits.

• Compliance should be a living process. By leveraging a regulatory tool, your practice can maintain real-time oversight of requirements, identify vulnerabilities before they escalate, and demonstrate to both patients and payers that compliance is built into your culture.

These resources cost little or nothing and directly support lease structures that meet § 411.357(a).

• 42 U.S.C. § 1395nn, Physician Self-Referral (Stark Law)

• 42 C.F.R. § 411.357(a), Rental of Office Space Exception

• 42 C.F.R. § 411.353, Prohibition on Certain Claims Resulting from a Prohibited Referral